Stockwatch Energy today
Energy Summary for Nov. 25, 2022
2022-11-25 19:58 ET - Market Summary
by Stockwatch Business Reporter
U.S. markets closed early as America went shopping for Black Friday bargains. West Texas Intermediate crude for January delivery lost $1.76 to $76.28 on the New York Merc, while Brent for January lost $1.71 to $83.63 (all figures in this para U.S.). Western Canadian Select traded at a discount of $29.07 to WTI, unchanged. Natural gas for December lost 29 cents to $7.02. The TSX energy index lost a fraction of a point to close at 262.55.
Oil prices seesawed throughout a short and thin session, ending with their third weekly decline in a row. China is grappling with spiking COVID cases, setting a fresh daily record today despite tightened restrictions in cities including Beijing, Shanghai and Guangzhou. Meanwhile, European diplomats are continuing to mull a Russian oil price cap of $65 (U.S.) to $70 (U.S.) a barrel. Traders are also keeping an eye on the U.S. Federal Reserve, whose economists warned policymakers earlier this month that the chances of a U.S. recession in the next year have risen to nearly 50 per cent.
Here in Canada, the mood was more upbeat, as the self-billed "economic engine of Canada" said oil prices remain "robust" enough to generate a hefty surplus. The government of Alberta released its mid-fiscal-year budget update yesterday and projected a total surplus of $12.3-billion. While this is lower than the previous projection of $13.2-billion in August, it marks a vast departure from years of multibillion-dollar deficits, showing how the province's fiscal position has "improved substantially," said Finance Minister Travis Toews.
The oil patch is forecasting its own improvements. This week, the Canadian Association of Energy Contractors -- formerly known as the Canadian Association of Oilwell Drilling Contractors, before it hopped aboard the trend of scrubbing sticky hydrocarbons out of one's name last year -- released an upbeat drilling forecast for 2023. It predicted that the sector will drill 6,409 oil and gas wells next year, up from this year's projected total of 5,582 wells. Both years mark an "exciting" change from the prior seven years of slowdowns, said chief executive officer Mark Sholz. (He opted not to mention that the combined well count in 2022 and 2023 is still likely to fall short of the industry's high point in 2014, when it drilled over 13,000 wells, but the optimism is still a satisfying change.)
Within the oil patch, George Fink's Cardium-focused Bonterra Energy Corp. (BNE) added 20 cents to $7.97 on 561,400 shares, after trumpeting a debt restructuring. It also unveiled a "strategic repositioning and outlook," in which -- through its habitual layers upon layers of wool -- it dropped some of its loudest hints yet about reviving its dividend.
The debt restructuring and the dividend are closely tied. Although Bonterra was previously a darling of yield investors, with a payout as high as 30 cents a month in 2014, its debt-heavy balance sheet led it to chip away at the dividend until finally suspending it in early 2020. In mid-2020, its bankers slapped it with a no-more-dividends restriction. A separate debt facility in late 2020 from the Business Development Bank of Canada (BDC) added to the ban. Interestingly, this did not stop Bonterra's founder, major shareholder and then-CEO, Mr. Fink, from telling the media in early 2021 that Bonterra had a short-term goal to return to having a dividend "every month, or at least every quarter." He may well have regretted raising shareholders' hopes. To their frustration, numerous competitors unveiled or revived dividends throughout 2021 and 2022, while Bonterra lagged behind.
New CEO Patrick Oliver (who succeeded Mr. Fink upon his retirement in September, at age 82) signalled today that the new debt restructuring may finally unshackle the possibility of payouts. The restructuring involves the closing of two new credit facilities and the repayment of the BDC debt. One of the new facilities is with "supportive" bankers -- though whether they support dividends was not explicitly stated -- and the other is with a private lender whose involvement "represents a significant step forward toward the company's goal of implementing ... sustainable dividends," according to Mr. Oliver. He also noted that the BDC debt, which had placed "restrictions ... [on] the payment of dividends," is fully repaid.
Investors seemed pleased, although many noticed that Mr. Oliver still steered well clear of a firm commitment on the dividend, suggesting that the immediate priority remains debt repayment. His only clue on timing was that Bonterra hopes to be "substantially" free of bank debt by mid-2023 and will then have "significant available liquidity and flexibility." The hope among investors is that the return of the dividend is finally in sight, roughly three years after its suspension.
To the north in the Swan Hills play, Doug Bailey and Frank Muller's Razor Energy Corp. (RZE) lost nine cents to $1.71 on 129,700 shares, after releasing mixed third quarter financials. It did its best to stay on the cheerful side. The press release hyped its production of 4,500 barrels a day (up from 4,300 in the second quarter), as well as its new geothermal power plant, which began ramping up on Sept. 9 and contributed $1.9-million in revenue for the quarter.
So thrilled was management about the plant's start-up that it put the news as the top "Highlight" in the press release. Investors had to read nearly to the bottom of the press release to learn that, once again, the plant is facing another big budget overrun. Razor originally reckoned last year that it could build the plant for $30-million. It quietly boosted that to $37-million last spring, and today it hiked it all the way to $48-million. While provincial and federal governments have kicked in about $16-million in grants, the ballooning cost is putting pressure on Razor's increasingly debt-burdened balance sheet.
Today's financials did little to comfort debt-leery investors. In its SEDAR filings (which were considerably less upbeat than the press release), Razor revealed that it had to obtain a covenant waiver from its main lender, the Alberta Investment Management Corp. (AIMCO), because it was nowhere near meeting the requirement to have break-even working capital as of Sept. 30. Instead its working capital on that date was negative $35.8-million. Razor will almost certainly need another waiver for Dec. 31. Failure to obtain the waiver could lead the $50.1-million AIMCo loan to become due on demand, and could also lead to a cross-covenant default on a separate $30-million loan from New York's Arena Investors.
Between the debt worries, soaring separate liabilities and a disproportionately meagre cash cushion of just $3.6-million as of Sept. 30, Razor's auditors flagged "significant doubt with respect to the company's ability to meet its obligations as they come due." Investors took that as their cue to keep heading for the exits. The stock closed today at $1.71, down from a peak of $4.14 last March.
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